A tax gift for business owners.
Imagine being able to sock away over 50% more savings than with an RRSP while contributions are fully tax deductible to your business and the money compounds tax free within the plan. At retirement, you receive a steady stream of income from a much bigger pool of retirement capital. Sound pretty good?
That, in a nutshell, is the essence of the Individual Pension Plan (IPP).
An IPP is a defined benefit pension plan for one or more individuals. Think of it as an enhanced RRSP for owners of private corporations and incorporated practice professionals.
Through an IPP, you make contributions that are fully tax deductible to your business. The contribution levels are unique, based on one’s age, past earnings and length of service with the company. So the older you are and the longer you have been incorporated, the more capital you can put away on a tax advantaged basis.
How much more?
Let’s use the example of a 55-year old business owner who has been incorporated since 1990. Using an IPP and RRSP program, the entrepreneur can build $1.7 million of tax-sheltered retirement capital at age 65 versus $1.1 million under an RRSP. That’s 54% more while creating an additional $322,000 of tax deductions.
What’s more, should the same entrepreneur decide to sell the business, he/she may be able to use the IPP structure to shelter some of the capital gain on the sale.
Why then have so relatively few – just over 8,000 business owners in Canada -- taken advantage of the opportunity?
For one thing, the IPP is best suited for individuals who have T4 income in excess of $100,000, are incorporated and over 40 years of age - and of course have the cash flow to make the contributions.
As well, traditionally, the knock against IPPs has been that they are costly to set up and administer, complicated and inflexible with respect to annual contribution requirements. Not to mention that few financial advisors are versed in all of the aspects of an IPP and therefore not comfortable recommending them to clients.
But a lot has changed since IPPs were first introduced. There have been market innovations, greater administrative automation and recent legislative changes that make them more attractive than ever.
There is a lot more flexibility with IPPs than most people realize. We can create all kinds of options to suit the individual and their circumstances in any given year. If, for example, the company has had a tough year and perhaps isn’t in a position to make the required contribution, there are a number of ways we can solve the issue.
As for cost, it’s no longer an issue based on our technology-based platform and economies of scale. An added benefit: the investment fees associated with an IPP are tax deductible to your corporation. That alone can save an entrepreneur several thousand dollars per year, depending on the size of the IPP.
In the last few years we have seen a dramatic increase in the amount of savings generated by setting up an IPP. Today it is common to see tax deductions of $250,000-$400,000.
At the end of the day, if you are a successful business owner over the age of 40, an IPP is definitely worth a look. It may be the best kept secret to maximizing wealth tax effectively – but word is getting out.
To learn more, visit IPPExperts.com for a personalized summary or email ipp@newportpartners.ca
